(Repeats without change)
By Matt Scuffham
TORONTO, Oct 12 (Reuters) - Canada's biggest life insurer is under pressure from shareholders to explain why it failed to disclose details of an ongoing court case which came to light after a short-seller released a report detailing the litigation.
The stock has dropped 11.5 percent since Muddy Waters Capital LLC said last week that it had taken a short position, compared with a 4.7 percent decline in the stocks in Canada's financial sector.
Muddy Waters cited a court case pending in the Canadian province of Saskatchewan it believes could damage Manulife's financials.
The case against Manulife was filed on Nov. 23, 2016 by Mosten Investment LP, managed by Ontario businessman Michael Hawkins, documents submitted to the court show.
The case relates to life insurance policies sold more than two decades ago, when interest rates were at much higher levels than they are today and allowed holders to invest their surplus funds in side accounts with guaranteed interest rates of up to 4.0 percent.
The gravity of the case is underscored by an affidavit filed by a partner with management consultants, Oliver Wyman, which states that if the side accounts can be used as investment vehicles it would potential expose insurers to unlimited liability and ultimately cause them to become insolvent. The consultancy was hired by Manulife's lawyers.
Insurance experts say the side accounts were meant to be used to ensure policy holders receiving income on their investments stayed within the limits required to avoid tax. If they were holding excess funds, they were deposited in the side accounts until they could be reinvested in the main policies.
Court documents show Mosten, which had a balance of just under C$17,000 in the side account in December, 2012, tried to deposit further funds in the spring of 2016 but Manulife refused to accept further deposits, prompting it to take legal action.
Publicly traded companies routinely alert shareholders to material risks through regulatory announcements but Manulife's decision to withhold the case has angered some shareholders.
"I think they should have disclosed it as soon as the legal action was filed," said Lorne Steinberg, president of Lorne Steinberg Wealth Management Inc, a Manulife shareholder.
Manulife declined to comment on Friday about whether it should have informed investors earlier about the case, which it said last Thursday was "legally unfounded".
The Ontario Securities Commission, which regulates publicly-listed companies in the province, declined to comment on the Manulife case. However, its rulebook states that a company's ongoing legal proceedings be disclosed in an annual information form which is distributed to investors.
Two other Manulife shareholders, who asked not to be named due to the sensitivity of the matter, said that they had questioned Manulife's investor relations team since last Thursday over why the case was not disclosed earlier but were told the insurer believed it may not have a material impact.
Shareholders said there should still have been some acknowledgement of the ongoing litigation risk.
David Anderson, chief executive of advisory firm Anderson Governance Group, said the case typified a lack of effective communication between Canadian companies and their investors.
"This general reluctance of boards to show a meaningful level of transparency expected by their shareholders continues to get companies into trouble," he said.
Additional reporting by John Tilak, Allison Martell, Fergal Smith and Chelsea Laskowski in Saskatoon; editing by Clive McKeef